Because trading in commodities has justifiably earned the reputation of being a risky pastime meant only for the steely hearted, most stock market investors have wisely steered clear of it. But this year witnessed the birth of a stimulating hybrid -- stock market index futures -- that straddles both spheres. Index futures can be a spectacularly cheap way of wringing maximum capital gains out of stock market moves and can also be used as a short-term insurance policy to protect positions in equities or in naked options.

Stock market futures are simply commodities contracts. The "goods" that they promise to deliver on a specified settlement date are certain stock market averages. Any futures contract is a clever device that the capitalist system has devised to help pin down inventory costs and sales prices using a competitive free market. What is most clever about it -- and perhaps the hardest concept to grasp for investors used to owning a tangible share of something -- is that there can be an infinite number of contracts based on a fixed amount of supply. Generally speaking, only 1% or 2% of futures contracts involve the actual transfer of goods; the rest are financially settled without being consummated.

In this manner, risk is transferred to speculators. As anathema as speculation may seem in a commercial arrangement that literally provides such everyday necessities as meat and potatoes, speculators, by being willing to take the other side of a "bet" on where actual future prices will be at a certain date, in fact contribute to what has become a remarkably fair, orderly, and liquid auction market driven entirely by the forces of supply and demand. That, in a coffee bean, is the basis of the market in which futures are now emerging.

What took stock futures so long to find a place among the hogs, wheat, copper, world currencies, Treasury bills, and other by-now-familiar commodities was that they are a totally abstract notion.Unlike other futures contracts (except those for Eurodollars), which ultimately yield a given commodity, stock market index futures never do. At the contract's settlement date, the stocks involved in the index that underlies the contract are not parceled out like eggs or pork bellies. That would be next to impossible. Of the three different futures being offered as of this writing (two other variations are in litigation), one is pegged to the Standard & Poor 500 Composite Index, another to all 1,500 or so of the common stocks of the New York Stock Exchange Composite Index, and the third to the nearly 1,700 stocks that make up the Value Line Composite Average as compiled by Arnold Bernhard & Co. Even if a clearinghouse undertook to deliver proportionately the stocks involved, shaving off the correct fractions would be all the more difficult with the first two, in that they are "weighted" averages, with a stock's capitalization determining its relative influence on the statistical calculation.

Instead of potentially delivering shares, all stock market index contracts simply expire. Accounts are evened on the last day, according to where the underlying index stands. If you are behind, you pay the clearinghouse; it pays you if you are owed. Then, as on a Vegas roulette table, the chips are cleared off the felt and a new contract is begun for future "delivery" 12 or 18 months hence. (Index futures are written in quarterly intervals.) Because there are no actual goods involved, rank speculators are deprived of the opportunity to execute one of commodity trading's more unsavory tactics -- the "squeeze," or "corner." In this bold maneuver, speculators scheme to take delivery of much of the limited supply of the commodity, thus controlling, as Bunker Hunt did with silver in 1979, its availability and price on the open market.

Another commoditylike characteristic of index futures comes in the type of brokerage account that must be set up. A commodities player has to meet minimum net worth and liquidity standards -- usually $75,000 and $20,000, respectively. Then, to buy or sell short a contract, margin must be put into the account.

Unlike margin in an equities account, the brokerage firm does not lend the customer the rest of the money; hence no interest is charged. Commodities margin is really a good-faith deposit. It can be made up of Treasury bills or money market funds, so that the deposit can continue to earn interest even while it is serving to take a futures position. Margin on stock market futures is around 10% of the value of the contract for speculators (defined as traders who don't have stock portfolios adding up to the value of the contract) and 5% for hedgers (those who do). Like other commodities, an index future is "marked to the market" each day. If there is a gain for the day, the customer can pocket it if he or she wishes; if there is a loss for the day, it is taken out of the account and sent to the exchange. If the losses bring the account below a certain maintenance level (usually $2,000), more money must be coughed up.

The first-ever stock index futures contract was introduced to public trading by the Kansas City Board of Trade on February 24, 1982. Contracts written through the KCBT have the Value Line average as their underlying commodity, with spot values 500 times the VLA. When the VLA index is at, say, 120, the spot contract is worth $60,000. Price increments are five basis points -- 0.05 in the VLA, or $25. At this writing, margin is $6,500 for speculators and $3,250 for hedgers.

Coincidentally, the comparative arithmetic for the other two works out in neat harmony. The Chicago Mercantile Exchange uses the S&P 500, which happens to be roughly at the same level as the VLA. Its contracts, too, are worth 500 times the index, and margin requirements are similar. The New York Futures Exchange (NYFE -- pronounced "knife") is predicated on the NYSE Composite, which is approximately half the other two; at 500 times the NYSE, two NYFEs are worth about one of the others.

Two more kinds of contracts readied for trading at still other exchanges ran into litigation that held them up. New York's Commodity Exchange Inc. (COMEX) attempted to attach itself also to Standard & Poor's, but was cited for copyright infringement by S&P. And the Chicago Board of Trade devised a parcel of contracts essentially using Dow Jones calculations. Dow Jones filed suit, however, feeling that it had the responsibility to ensure that its name or products not be connected with a speculative trading device.

Although they are not subject to surprise freezes as are, say, orange juice futures, index contracts are as volatile as commodities and must be treated with equal care. You can make a lot of money in a hurry, to be sure, but by the same token the person on the other side of the contract is losing it just as fast -- and that could as easily have been you. If the NYSE drops 100 basis points -- from 63.50, perhaps, to 62.50 -- the holder of the contract has lost $500. Since he has put up only $3,500, that is a hefty 14%. And stocks are capable of dropping that much in a matter of hours.

What makes index futures the big-payoff (or big-loss) gambles they are is the leverage: Margins are only one-fifth those of the 50% required in the stock market. So, as practitioners have started to proclaim, "you get more bang for the buck." But index futures are not merely educated dice rolls. For the same small fee, a money manager of a large portfolio might hedge his or her portfolio at questionable market junctures -- certainly a noble endeavor, despite Dow Jones's protests. (Curiously, say observers, institutions have yet to catch on to the benefits.) And an investor with an exposed position in naked stock options or, say, a short position in stocks, would do well to clothe himself in cheap futures protection from time to time.

Once you're in a wagering frame of mind, the questions are, which is the best contract, and what is the best tactic? The most popular version so far has been that of the Chicago Mercantile Exchange. One large money manager speculating in stock futures attributes this to the exchange's liquidity; the investment firm trades 100 contracts at a time, and finds that the CME can digest such large orders handily. The promotion-minded CME has quickly gained a reputation as a good order filler, a function of its experienced floor traders and pool of in-house trading pit speculators known as "locals." But probably the major reason for the CME's early lead is that among the three indexes, the S&P 500 is the most widely recognized.

An attraction of the Kansas City VLA contract is that its index undergoes wider swings than the other two. This is because it includes some faster-moving Amex and OTC stocks, and because it is not weighted in favor of ponderous blue-chip issues. Thus beyond the one-to-one protection a hedger with a $60,000 portfolio might get from the S&P and the NYSE indexes, VLA tacks on an extra fraction; speculators, too, get a faster run for their money. In one particularly hectic stretch recently, the Value Line average was down about four points, while the NYSE dropped only 1 1/2; at the two-to-one multiple that pertains, the VLA outdid its rival by 33%. Furthermore, the VLA occasionally leads the weighted averages in anticipating trends.

But, traders report, Kansas City suffers liquidity problems. That is all right if you buy a far-out contract and sit with it for a while. But speculating traders jump in to grab a handful of contracts in one hour and dispose of them for quick profits a few hours or a day or two later. An exchange that cannot offer close markets is shunned by such in-and-out traders, who are wary of not being able to jettison positions in a hurry -- often via automatic stop-loss orders -- at reasonable prices. For its part, Kansas City is mounting a well-prepared educational campaign, and is steadily increasing its volume, thus enhancing liquidity.

One thing NYFE has going for it is fast and tight executions. Speculators feel comfortable with NYFE contracts, but they don't appreciate NYFE's comparatively high commissions. Because speculators are apt to trade 10 NYFEs for five of either of the other stock market futures, commissions are nearly double. A round trip may cost only about $20 at a discount broker for any of the three, but if you multiply that by 10 contracts, a healthy chunk is taken out of potential daily profits. NYFE's best attraction is the high degree of correlation between its contract and the spot price: On 9 out of 10 trading days, says NYFE, its contract moves in tandem with the index.

Chances are index futures will be treated like commodities profits by the Internal Revenue Service and thus subject to a tax of only 32%, no matter how short the holding period, which can be a matter of an hour or two. This summer, stock index futures were part of the Tax Correction Act of 1982 then before the House Ways and Means Committee; if passed, they would officially gain rank as a true commodity. Due to their leveraged status, however, they cannot be used in an IRA or Keogh.

Stock futures solve a problem that has beset traders ever since the Securities and Exchange Commission instituted its short-sale uptick rule in 1938. Because you can't sell short unless the stock involved has moved up to its current price prior to the short sale, it was difficult to get off shorts in falling markets. With the advent of futures, however, a trader is now able to establish a broad short position with no muss or fuss.

As stock market index futures become more widely used, trading techniques grow more intricate. One conservative approach borrowed from real-commodity trading is the spread, in which the spreader takes opposite positions in a near contract and one further out. Savvy market students are also examining index futures for possible sentiment-indicator applications. Contracts have been trading mostly between a 2% premium (that is, the contract is valued 2% higher than the spot index behind it) and a 2% discount. As soon as enough empirical evidence is in, undoubtedly the quality of index futures trading will become a significant technical "signal."

But such considerations are only the beginning of what promises to be Wall Street's fastest-paced game since the infamous short-squeezing pools of the 1920s. Already two variations are on the boards. One is to diversify the underlying commodity, writing contracts, for example, on specific industry groups such as computers and semiconductors, or on divisions of the market like high capitalization stocks or transportation.

Better still will be the most abstract function yet devised for using money: options on index futures -- a thrice-removed dynamic of capital investment. Applications to trade such options have already been filed with the federal regulatory body, the Commodity Futures Trading Commission. Options on stock futures will be an irresistible field. Their lure will be that losses can be fixed while positions can be taken on broad market moves. And it is always easier to predict which way the market is about to go than to pick the individual stocks within it.